“For all its current economic woes,” the Economist
magazine recently asserted, “America remains a beacon of
entrepreneurialism.” That idea is at the heart of
America’s self-image. Both parties celebrate
entrepreneurial small business as the fount of
innovation and growth. Even if America no longer
manufactures its own smartphones or computers, we cling
to the idea that American entrepreneurs invent most of
the new products and services that matter to the
world.Americans also view entrepreneurialism as a vital
route to upward mobility—a way for average people to
build wealth, in the form of a business venture that can
be passed on to one’s children or sold upon retirement.
Whether it’s the family farm or the local diner, small
businesses have traditionally provided citizens not only
with income but also with a place to teach kids the
value of responsibility and hard work.Then there’s the
role entrepreneurs play in creating jobs. One recent
study by the Small Business Administration (SBA) showed
that businesses with fewer than twenty employees were
responsible for more than 97 percent of all new jobs
between 1988 and 2004.More broadly, Americans have
traditionally seen entrepreneurship as a crucial measure
of the nation’s political vibrancy and liberty. We hold
that the more independent citizens we have, the more
widely power, responsibility, and voice will be
distributed, and hence the stronger our democracy will
be. The basic thinking here was best expressed by James
Madison more than 200 years ago, when he wrote that the
“greater the proportion” of citizens who are their own
masters, “the more free, the more independent, and the
more happy must be society itself.”Yet how much does
this faith in the vigor of American entrepreneurialism
stand up to scrutiny? To a casual news consumer, it
might seem that it has never been easier to launch and
grow a new venture. One highly publicized study claimed
that the United States leads all major industrial
economies in the percentage of the adult population
engaged in entrepreneurial activity. “We are in the
midst of the largest entrepreneurial surge this country
has ever seen,” a CNNMoney article tells us. Or, as the
Council on Competitiveness has observed, “One of the
critical drivers of America’s economic dynamism and
flexibility has been the strength of its entrepreneurial
economy.”Last summer, however, a report by the Ewing
Marion Kauffman Foundation exposed a big crack at the
base of this widely held belief. “Even before the
overall economy started its most recent downturn,” the
authors noted, the number of business births had already
“peaked.” Worse, with the onset of the Great Recession
these numbers began to “plummet,” with the number of new
independent employers dropping 27 percent in only three
years.This spring Kauffman followed with a second report
that was in many ways even more dire. Compared to a
generation ago, the report said, it is now much harder
to start a business in America and keep it running. In
1980 “young firms”—those less than five years
old—accounted for almost half of all going concerns. By
2010, their share of the total had collapsed to less
than 35 percent. And as the Kauffman authors made clear,
this doesn’t only mean less opportunity for America’s
entrepreneurs. It also means millions fewer jobs every
year, and much less economic growth.Inspired by
Kauffman’s report last summer, we set out to examine for
ourselves the health of America’s entrepreneurial
economy. What we discovered is that the decline in
entrepreneurship is even bigger and more systemic in
nature than was clear from Kaufmann’s work. America
really is undergoing a radical change in the structure
of our political economy. And yet this revolutionary
shift of power, control, and wealth has remained all but
unrecognized and unstudied by the mainstream media,
Capitol Hill, the White House, state legislatures, and
both party machines.A good way to begin getting a sense
of the magnitude of the drop-off in entrepreneurship—and
its potential significance—is to examine the number of
new “employer businesses” created every year, as
compiled by the Census Bureau. The Census defines
employer businesses as proprietorships, partnerships,
and corporations that have at least one paid employee.
In other words, we’re not talking about the midlevel
executive turned “consultant,” not the nanny who pays
taxes, not the part-time potter puttering around
Etsy.According to the Census Bureau’s raw data, the
total number of employer businesses has grown
continuously over the last three decades. When we focus
only on this one number, we get an image of slow and
steady expansion in the ranks of entrepreneurs. Which is
why this figure is used so often to buttress claims of
the nation’s entrepreneurial health.The problem with
this picture, however, is that it does not account for
the fact that between 1977 (the first year the Census
captured this “employer business” data) and 2009 the
working-age population in the United States increased by
seventy-five million people. If we adjust for this
expansion, a much darker picture emerges. New business
formation in America is revealed to have actually fallen
dramatically over the last generation.In 1977, Americans
created more than thirty-five new employer businesses
for every 10,000 citizens age sixteen and over. By 2009,
however, Americans were annually creating fewer than
eighteen such businesses, a 50 percent drop. While the
Great Recession clearly cut into new business creation,
the decline was clear well before 2007. The averages
across decades capture that decline: between 1977 and
1989 Americans created more than twenty-seven new
businesses for every 10,000 working-age citizens. This
compares to fewer than twenty-five in the 1990s and
around twenty-two in the 2000s. In and of itself, this
decline in the number of new employer firms does not
prove that the average American citizen is less able or
less willing to launch a new business. A greater
percentage of our entrepreneurially minded citizens
might, for instance, be content to work as one-person
operations. Indeed, in recent years we saw the rise of a
new form of entrepreneurial hero—the self-employed
“freelancer.” In the well-known phrase coined by
business guru Dan Pink in the late 1990s, America was to
become a “free agent nation,” in which individual
citizens voluntarily choose the flexible work
arrangements that come with solo gigs and short-time
contract arrangements.Here, too, we decided to test the
common perception—repeated endlessly in the business
press—against actual Census Bureau figures, once again
adjusting for the growth in the working-age population.
And here, too, we found that the official statistics
contradicted the theory—at least as it applies to the
population as a whole.Data kept by the Small Business
Administration, for instance, shows that the share of
the working-age population that is self-employed has
been declining since 1994. The share fell steadily until
2002, stayed level between 2003 and 2006, then began to
drop again. Overall, between 1994 and 2009, the share
declined nearly 25 percent.This drop in the number of
self-employed citizens relative to the overall working
population is also captured by the Bureau of Labor
Statistics, which isolates nonfarm workers. The BLS
survey asks workers if they are employed by a private
company, a nonprofit organization, or the government, or
are self-employed. Self-employed workers are further
separated into those who have incorporated their
businesses and those who have not.According to the BLS,
the number of Americans who are both self-employed and
not incorporated has fallen significantly as a share of
the working-age population, from 461 per 10,000 in 1990
to 359 in 2011. This decline—more than 22
percent—reversed a long trend in the opposite direction
during the 1970s and ’80s. The BLS data shows a somewhat
different picture when it comes to self-employed persons
who incorporate their businesses. As a share of the
working-age population, their ranks grew 35 percent
between 1989 and 2008, before dropping off sharply in
2009. Yet this increase in incorporation may be evidence
not so much of rising entrepreneurship as of existing
unincorporated one-person firms deciding to change their
legal status—to take better advantage of new limited
liability laws in many states, for instance, in order to
cut their tax bills.Even if we accept this number
without question, however, the total share of the
self-employed dropped steadily over the last two
decades. In 1994 there were roughly 663 self-employed
(incorporated and unincorporated) for every 10,000
working-age Americans; by 2009 this number was down to
606, an 8.5 percent decline.If anything, there’s good
reason to believe that this decline in entrepreneurship
is even steeper than government data shows, thanks to
what appears to be systematic miscategorization by the
government of what counts as a true independent company.
Since the 1990s, large companies have increasingly
relied on temporary help to do work that formerly was
performed by permanent salaried employees. These
arrangements enable firms to hire and fire workers with
far greater flexibility and free them from having to
provide traditional benefits like unemployment
insurance, health insurance, retirement plans, and paid
vacations. The workers themselves go by many different
names: temps, contingent workers, contractors,
freelancers. But while some fit the traditional sense of
what it means to be an entrepreneur or independent
business owner, many, if not most, do not—precisely
because they remain entirely dependent on a single power
for their employment.Consider, for instance, how FedEx
Ground has long treated the men and women who drive its
trucks. The company obligated the drivers to lease FedEx
trucks, to wear FedEx uniforms, and to deliver FedEx
packages along routes assigned by the company. Then the
company insisted on classifying the drivers as
independent contractors, a status that enabled FedEx to
protect itself against unionization and to avoid paying
benefits.Over the years, FedEx Ground’s treatment of its
drivers was the subject of protracted—and highly
public—legal battles. Yet the Census Bureau never made
any attempt to adjust government statistics to
distinguish these drivers (and the legions of other
similarly “independent” workers who depend entirely on a
single employer) from the upstart entrepreneur who
designs a new sports shoe or opens a new restaurant or
founds a biotech firm. Since 2010 FedEx Ground has moved
away from the independent contractor model, and the
company now requires its drivers to register as
corporations. Even those drivers who might have been
counted as wage and salary workers before are now
counted as independent small businesses.The conclusion
is clear. We see a sharp decline in entrepreneurship
across the board, among new employer firms and
one-person shops. And at least when it comes to employer
firms, this decline traces back more than thirty years,
to the late 1970s. The drop-off in entrepreneurship in
America, in other words, is big, and it is
fundamental.So what explains the steep decline in
American entrepreneurship? Some might point to high
taxes. Yet tax rates have generally gotten lower during
exactly the period when entrepreneurship rates have been
in decline. Others would finger oppressive regulation.
And certainly there’s little doubt that poorly conceived
government regulation can make it hard for entrepreneurs
to get ahead or just to stay in business. In one recent
example, a county health inspector in California
threatened to shut a twenty-year-old farmers market
because the nearest restroom was 220 feet away, rather
than the 200 feet stipulated by law.Yet it’s hard to
hold “regulation” per se responsible for the dramatic
decline in entrepreneurship we’ve witnessed over the
last generation. Indeed, from a regulatory point of
view, in many respects it is now easier than it has been
in decades to start a new business. Not only has the
Internet simplified the tasks of tracking regulations
and interacting with regulators, but many states now
offer one-stop incorporation services.Another common
explanation for the decline in entrepreneurship is
technology. Over the last generation, digitization has
displaced many independent businesses—think travel
agencies, bookstores, and record stores. Moreover,
technology creates an opportunity to combine many
smaller businesses into a few giant concerns—as, for
instance, when a single online retailer like Amazon
takes advantage of the fact that the Internet destroys
all traditional geographic constraints to create a
nation-spanning book sales monopoly. Yet here again, on
balance, it’s hard to blame technology for a decline of
this magnitude. For one thing, many of the most
celebrated start-ups in recent decades have been in
high-tech fields. More important, many of these new
digital technologies—like automated bookkeeping programs
and wireless credit card readers—have made it far easier
for other small operators to get into business and to
keep going.Two other possible explanations for the
decline are harder to dismiss.Perhaps the most common
complaint among small business entrepreneurs is a
shortage of financing. While the rise of the venture
capital business might give the impression that
financial support for entrepreneurs has never been
easier to obtain, the truth is that only a tiny fraction
of start-ups have access to venture funds. To get their
businesses up and running, the vast majority of
entrepreneurs today tend to rely at first, as they
always have, on a combination of personal savings and
contributions from family and friends. But with family
balance sheets ravaged by stagnant wages and
skyrocketing costs for health care and higher education,
fewer and fewer average families have the savings needed
to invest in a small business.The effects of the radical
consolidation in the banking industry that began in the
1980s are equally dramatic. Relatively few bank officers
today have the leeway and local knowledge to lend to
established local businesses, much less new ventures.
This is especially true in bad times, when big
institutions come under great pressure both from Wall
Street and regulators. In Maryland, for example, Bank of
America made 312 SBA-guaranteed loans to local
businesses in 2007. In 2010, it made two. Consolidation
also concentrates the power of a few financial
institutions over small businesses, and radically raises
the risk that entire funding systems can collapse all at
once. The near breakdown of CIT Group in early
2009—averted only by a last-minute deal with
bondholders—would have cut more than a million small
businesses off from some of the most important forms of
day-to-day business financing.The single biggest factor
driving down entrepreneurship is precisely the radical
concentration of power we have seen not only in the
banking industry but throughout the U.S. economy over
the last thirty years. This revolutionary remaking of
almost every economic activity in the nation was set in
motion in 1981, when officials in the Reagan
administration all but suspended traditional enforcement
of America’s antimonopoly laws, a change in policy then
adopted by every subsequent administration. Since then,
regulators have done almost nothing to stop the great
waves of mergers and acquisitions, with the result that
control over most major economic activities is now more
consolidated than at any time since the Gilded Age.The
effects have been nowhere more dramatic than in those
sectors that have always been most congenial to
individual proprietorships, like retail, services,
farming, and small manufacturing. These were the
activities most affected, for instance, by the type of
“roll-up” strategies pioneered by financiers like Mitt
Romney’s Bain Capital. In the case of the office-supply
retailer Staples, Bain’s investment helped propel the
company from a one-store operation to a 2,000-store
international behemoth. Similar plays resulted in Home
Depot capturing a vast proportion of the nation’s
hardware business, in Best Buy capturing a vast
proportion of America’s electronics business, and in
Macy’s capturing a vast proportion of all department
store sales. Just one company, Wal-Mart, now controls
upward of 50 percent of some lines of grocery and
general merchandise business—commerce that a generation
ago was divided among tens of thousands of families.
Indeed, the decline of small business documented here
appears to confirm that the great social experiment
undertaken a generation ago—when we allowed our
government to cease enforcement of our antimonopoly
laws—has had a devastating effect not only on our
democracy but also on the ability of ordinary Americans
to build their assets and move up the socioeconomic
ladder through enterprise. The loss of job creation that
comes with the hollowing out of America’s
entrepreneurial sector also goes a long way toward
explaining why American businesses were creating fewer
and fewer jobs even before the Great Recession hit. The
founding generation was right: as America’s
entrepreneurs go, so goes America’s prosperity and
democracy. If we are ever to recapture the promise of
this land, we must first break down the great powers
that crush the individual citizen’s initiative and
ability to create and build what is new and better.
